Wednesday, November 27, 2013

The U.S. District Court for the Eastern District of Virginia recently dismissed all of a group of borrowers' claims against a foreclosure law firm and substitute trustees, ruling that the loan servicer was properly identified as "the creditor to whom the debt is owed" under section 1692g(a)(2) of the FDCPA in their "debt validation" or "1692g" notices, and entitled to appoint substitute trustees under the deed of trust.

A copy of the opinion is attached.

Following the foreclosure sale of their home, Borrowers filed suit challenging the sale.In addition to claims against the lender, Borrowers sued the Foreclosure Law Firm and Substitute trustee each for violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. §1692, et seq., ("FDCPA") and breach of fiduciary duty.

Borrowers asserted three counts under the FDCPA.First Borrowers claimed that the loan servicer was improperly identified as creditor in the initial communication under Section 1692g.Second, Borrowers claimed the amount of the debt was falsely stated in violation of Section 1692e.Third, Borrowers claimed that that the Foreclosure Firm and Substitute Trustee committed unfair and deceptive trade practices in violation of Section 1692f(6), by claiming a right that did not exist.Notably, Borrowers argued that the loan servicer was not the holder of the loan, and that only the owner of the loan could appoint trustees to foreclose, as opposed to the loan servicer.

Likewise, Borrowers' breach of fiduciary claim alleged that the Substitute Trustee and Foreclosure Firm breached the fiduciary duty owed to Borrowers under the Deed of Trust, by failing to seek aid and direction from the court and proceeding to foreclose with knowledge that Borrowers were seeking a loan modification, and were seeking to reinstate within 5-days of the foreclosure sale, despite having no such right under the Deed of Trust.

As you may recall, Section 1692g(a) of the FDCPA requires, among other things, that within 5-days of a debt collector's initial communication, the debt collector identify "the name of the creditor to whom the debt is owed."15 U.S.C. §1692g(a)(2).

Section 1692e(2) prohibits a debt collector from using "any false deceptive, or misleading representation or means in connection with the collection of any debt… [including t]he false representation of… the character, amount, or legal status of any debt."15 U.S.C. §1692e(2).

Section 1692f(6) prohibits a debt collector from using "unfair or unconscionable means to collect or attempt to collect any debt… [including t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of the property if… there is no present right to possession of the property claimed as collateral through an enforceable security interest."15 U.S.C. §1692f(6).

Considering the identification of the "creditor" under the FDCPA, the Court determined that "[a]lthough the precise issue has apparently not been addressed by the Fourth Circuit, the overwhelming weight of persuasive authority from the other circuit courts as well as district courts in this Circuit compel the conclusion that the terms 'creditor' and 'debt collector' under the FDCPA are mutually exclusive."Slip Op. at 16.

In determining which of the two definitions applies, the Eastern District of Virginia noted that courts have looked to the status of the debt at the time it was acquired.See id.Under 15 U.S.C. §1692a(6)(F)(iii), the term "debt collector" does not include "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity… concerns a debt which was not in default at the time it was obtained by such person."

In dismissing Borrowers' claim of misidentifying the creditor, the Court noted that the Borrowers alleged that the servicer was the originator of their loan and had retained the servicing rights to their loan.Therefore, because the loan servicer had acquired its servicing rights before default, it is a "creditor" under the plain language of the statute and, as a matter of law, as a "creditor" it cannot also be a "debt collector."See Slip Op. at 17.

Consequently, the Court held that the notice to Borrowers identifying the loan servicer as the "creditor" to whom they owed a debt did not misidentify the party to whom the debt was owed and did not give rise to a plausible claim to relief against either Substitute Trustee or Foreclosure Firm under 15 U.S.C. §1692g(a)(2).See id.

As to Borrowers' claim of falsely representing the amount of the debt, the Court determined that, to plead false representation under the FDCPA, Borrowers must show that the representations are material.Thus, the Court determined that the Borrowers mere allegations that the statement is false was insufficient to state a claim for an alleged false representation of the amount of the debt.See id. at 29.

Considering the Substitute Trustee's authority to foreclose under Section 1692f(6) of the FDCPA, the Court recognized the loan servicer's ability to appoint Substitute Trustees.Notably, in construing Virginia Code Section 55-59(9), which affords the secured party the right and power to appoint a substitute trustee, courts have not determined it "to mean that only the secured party or noteholder itself may appoint a substitute trustee, and have instead upheld the right of loan servicing entities, acting as agents, to do so."Slip Op. at 22.

Although Borrowers argued that loan servicer's obligations did not include the right to appoint a substitute trustee, the Court determined that the servicer was empowered to initiate foreclosure proceedings and therefore, had the authority to appoint the Substitute Trustee to conduct the foreclosure.See id. at 23-24.

As to the breach of fiduciary duty claim against Substitute Trustee, the Court found that although a deed of trust gives rise to certain fiduciary duties, "a trustee only owes those duties listed in the deed of trust itself.A trustee under a deed of trust has no due diligence duty. . . Further, there is no common law duty of impartiality incumbent upon a trustee." Slip Op. at 25-26. Rather, "[Substitute Trustee's] only affirmative duty under the Deed of Trust with respect to [Borrowers] was its duty to give them notice of the foreclosure sale."Id. at 26. Accordingly, the Court determined that Borrowers did not assert a breach of any duty arising out of the Deed of Trust, and that no duty of impartiality is recognized at common law.

As to the Foreclosure Firm, the Court determined that there is no basis upon which Borrowers may allege the breach of any duty.Because there is no privity between Borrowers and Foreclosure Firm, there can be no claim for any breach of any duty in contract."[Foreclosure Firm] is not the lender, the noteholder, the loan servicer, the trustee, or the substitute trustee, and no attorney-client relationship existed between it and [Borrowers]. Indeed, not even [Substitute Trustee], [Foreclosure Firm's] principal, is a party to the contract.Accordingly, there is no basis upon which [Borrowers] may allege the breach of any duty against [Substitute Trustee's] agent, [Foreclosure Firm]."Id. at 29.

Accordingly, the Court granted the motion to dismiss filed by Substitute Trustee and Foreclosure Firm, but denied the motion to dismiss filed by the lender and loan servicer, which sought dismissal on other grounds.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.